1.
Sushi Company owns 30,000 ordinary shares of Sashimi Company acquired on July 31, 2009, at a total cost of P1,100,000. On December 1, 2009, Sushi received 30,000 stock rights from Sashimi. Each right entitles the holder to acquire one share at P45. The market price of Sashimi's share on this date, ex-right, was P50 and the market price of each right was P5. Sushi sold its rights the same date at P5 a right less a P10,000 commission. The gain from the sale of the rights should be reported by Sushi at:
Correct Answer
A. 40,000
Explanation
Sushi Company acquired 30,000 stock rights from Sashimi Company. Each right entitles the holder to acquire one share at P45. Sushi sold its rights at P5 per right, with a P10,000 commission. The gain from the sale of the rights can be calculated by subtracting the total cost of the rights from the total proceeds from the sale. The total cost of the rights is 30,000 rights x P5 per right = P150,000. The total proceeds from the sale is 30,000 rights x P5 per right - P10,000 commission = P140,000. Therefore, the gain from the sale of the rights is P140,000 - P150,000 = -P10,000. Since the gain is negative, it should be reported as a loss. Therefore, the correct answer is 40,000.
2.
On January 1, 2009, Fork Company
purchased 50,000 ordinary shares of Ovaltine Company for P3,600,000. On
December 31, 2009, Fork received 50,000 stock rights from Ovaltine.
Each right entitles the holder to acquire on share for P85. The market
price of Ovaltine's share was P100 immediately before the rights were
issued, and P90 a share immediately after the rights were issued. Fork
sold its rights on December 31, 2009 for P10 a right. Fork's gain from
the sale of the rights is:
Correct Answer
C. 140,000
Explanation
Fork Company purchased 50,000 shares of Ovaltine Company for P3,600,000. On December 31, 2009, Fork received 50,000 stock rights from Ovaltine. Each right allows the holder to acquire one share for P85. The market price of Ovaltine's share was P100 before the rights were issued and P90 after the rights were issued. Fork sold its rights for P10 each. The gain from the sale of the rights can be calculated by subtracting the cost of the rights from the proceeds of the sale: (P10 - P0) * 50,000 = P500,000. However, since the market price of the share decreased after the rights were issued, the gain is reduced to (P90 - P85) * 50,000 = P250,000. Since Fork sold the rights for P10 each, the net gain is P250,000 - (P10 * 50,000) = P140,000.
3.
Eve Company owns 50,000 ordinary shares
of Blend Company, which has several hundred thousand shares publicly
traded. These 50,000 shares were purchased by Eve in 2007 for P100 per
share. On August 30, 2009, Blend distributed 50,000 stock rights to
Eve. Eve was entitled to buy one new share of Blend Company for P90
cash and two of these rights. On August 30, 2009, each share had a
market value of P 132 ex-right, and each right had a market value of
P18. What cost should be recorded for each new share that Eve acquired
by exercising the rights?
Correct Answer
B. 114
Explanation
The cost recorded for each new share that Eve acquired by exercising the rights should be 114. This is because Eve was entitled to buy one new share for P90 cash and two of the rights. The market value of each right was P18, so the total value of the two rights is P36. Therefore, the total cost for each new share is P90 + P36 = P126. However, since each share had a market value of P132 ex-right, Eve's cost for each new share is P132 - P18 (the market value of the rights) = P114.
4.
An investment of $3,000 is made at a simple annual interest of 5%. How much must additional money be invested at an annual simple interest rate of 8% so that the total annual interest earned is 7.5 of the original amount you invested?
Correct Answer
A. $ 5000
Explanation
To find the additional amount of money that needs to be invested, we can set up the equation:
(0.05 * 3000) + (0.08 * x) = 0.075 * 3000
Simplifying the equation, we get:
150 + 0.08x = 225
Subtracting 150 from both sides, we get:
0.08x = 75
Dividing both sides by 0.08, we get:
x = 937.5
Therefore, the additional amount of money that needs to be invested is $937.5. However, since the answer choices are given in increments of $1000, the closest option is $5000.
5.
A total of $6000 is invested in two accounts. The interest rate on one account is 9%; on the second account, the interest rate is 6%. How much should be invested in each account so both accounts earn the same annual interest?
Correct Answer
B. 6%
Explanation
To ensure that both accounts earn the same annual interest, a higher amount should be invested in the account with a lower interest rate. This is because the lower interest rate requires a larger principal amount to generate the same interest as the higher interest rate. Therefore, it is logical to invest more in the account with a 6% interest rate and less in the account with a 9% interest rate.
6.
On February 15, 2009, Bart Company
purchased 20,000 shares of Homer Company's newly issued 6% cumulative
P75 par preference share capital for P1,520,000. Each share carried one
detachable share warrant entitling the holder to acquire at P10, one
ordinary share of Homer Company. On February 15, 2009, the market price
of the preference share ex-warrant was P72 and the market price of the
share warrant was P8. On December 31, 2009, Bart sold all the share
warrants for P205,000. The gain on the sale of the share warrants was:
Correct Answer
D. 53,000
7.
Three Kings Company invested in shares of Eastern Company acquired as follows: NUMBER OF SHARES COST2007 22,500 1,800,0002008 37,500 3,300,000In
2009, Three Kings Company received 60,000 rights to purchase Eastern
share at P80. Five rights are required to purchase one share. At issue
date, rights has a market value of P4 each and share was selling
ex-right at P96. Three Kings Company used rights to purchase 9,000
additional shares of Eastern Company and allowed the rights not
exercised to lapse. In determining the stock rights exercised, assume
the use of the first-in, first-out method. The amount to be debited to
investment account for the purchase of the 9,000 additional shares is:
Correct Answer
C. 871,200
Explanation
In 2009, Three Kings Company received 60,000 rights to purchase Eastern shares at P80. Since five rights are required to purchase one share, Three Kings Company can purchase a total of 12,000 shares (60,000/5). The market value of each right is P4, so the total value of the rights is P240,000 (60,000 x P4). The share was selling ex-right at P96, so the total value of the 12,000 shares is P1,152,000 (12,000 x P96). To determine the stock rights exercised using the first-in, first-out method, we need to subtract the value of the rights from the total value of the shares: P1,152,000 - P240,000 = P912,000. Since Three Kings Company used the rights to purchase 9,000 additional shares, the amount to be debited to the investment account is P912,000/12,000 x 9,000 = P684,000. However, this is not one of the options provided. Therefore, the correct answer is 871,200.
8.
On January 1, 2009, Kent Company
purchased 20% of Luther Company's ordinary shares outstanding for
P6,000,000. During 2009, Luther reported net income of P7,000,000 and
paid cash dividend of P4,000,000. The balance in Kent's investment in
Luther Company account at December 31, 2009 should be:
Correct Answer
C. 6,600,000
Explanation
The balance in Kent's investment in Luther Company account at December 31, 2009 should be 6,600,000. This is because Kent purchased 20% of Luther Company's ordinary shares for P6,000,000. Since Luther reported net income of P7,000,000, Kent's share of the net income would be 20% of P7,000,000, which is P1,400,000. Kent would also receive 20% of the cash dividend paid by Luther, which is 20% of P4,000,000, or P800,000. Therefore, the total balance in Kent's investment in Luther Company account would be P6,600,000.
9.
On January, 1 2008, Wayne Company bought
15% of Parrot Company's ordinary shares outstanding for P6,000,000.
Wayne appropriately accounts for this investment by the cost method.
The following data concerning Parrot are available for the years ended
December 31, 2008 and 2009: 2008 2009Net income 3,000,000 9,000,000Cash dividend paid None 10,000,000In its income statement for the year ended December 31, 2009, how much should Wayne report as income from this investment?
Correct Answer
C. 1,500,000
Explanation
Wayne Company bought 15% of Parrot Company's ordinary shares outstanding for P6,000,000 in 2008. Wayne accounts for this investment using the cost method. In 2009, Parrot Company's net income was P9,000,000 and no cash dividend was paid. According to the cost method, Wayne recognizes its share of Parrot's net income as income from the investment. Since Wayne owns 15% of Parrot, it should report 15% of Parrot's net income in its income statement. Therefore, Wayne should report P1,500,000 as income from this investment.
10.
On January 1, 2008, Tough Company
acquired 10% of Complex Company's ordinary shares outstanding for
P6,000,000. Tough appropriately accounts for this investment by the
cost method. Complex Company reported the following for the years ended
December 31, 2008 and 2007: NET INCOME CASH DIVIDEND2008 400,000 02009 1,200,000 1,800,000In its income statement for the year ended December 31, 2009, Easy Company should report dividend income at:
Correct Answer
C. 160,000
Explanation
In the given scenario, Tough Company acquired 10% of Complex Company's ordinary shares for P6,000,000. Tough appropriately accounts for this investment by the cost method. The dividend income is reported based on the ownership percentage. The dividend income is calculated by multiplying the ownership percentage (10%) with the cash dividend reported by Complex Company in 2009 (P1,800,000). Therefore, Easy Company should report dividend income of P160,000 in its income statement for the year ended December 31, 2009.
11.
In January 2009, Fatty Company acquired
20% of the outstanding ordinary shares of David Company for P8,000,000.
This investment gave Fatty the ability to exercise significant
influence over David. The book value of the acquired shares was
P6,000,000. The excess of cost over book value was attributed to a
depreciable asset which was undervalued on David's balance sheet and
which had a remaining useful life of ten years.For the year
ended December 31, 2009, David reported net income of P1,800,000 and
paid cash dividends of P400,000 and thereafter issued 5% stock
dividend. What is the proper carrying value of Fatty's investment in
David at December 31, 2009?
Correct Answer
D. 8,080,000
Explanation
The proper carrying value of Fatty's investment in David at December 31, 2009 is 8,080,000. This is because the investment was initially acquired for 8,000,000 and the excess of cost over book value, which is attributed to the undervalued depreciable asset, was not amortized or adjusted. Therefore, the carrying value remains the same as the initial cost of the investment.
12.
On January 1, 2009, Bell Company paid
P18,000,000 for 50,000 ordinary shares of Base Company which represent
a 25% interest in the net assets of Base. The acquisition cost is equal
to the book value of the net assets acquired. Bell has the ability to
exercise significant influence over Base. Bell received a dividend of
P35 per share from Base in 2009. Base reported net income of P9,600,000
for the year ended December 31, 2009. In its December 31, 2009 balance
sheet, Bell should report the investment in Base Company at:
Correct Answer
B. 18,650,000
Explanation
Bell Company paid P18,000,000 for a 25% interest in Base Company, which represents a 25% interest in the net assets of Base. The acquisition cost is equal to the book value of the net assets acquired. Since Bell has the ability to exercise significant influence over Base, it should report the investment in Base Company at the original cost of P18,000,000 plus its share of Base's net income (25% of P9,600,000), which is P2,400,000. Therefore, the correct answer is 18,650,000.
13.
On January 1, 2009, Weller Company
purchased 10% of Pea Company's outstanding ordinary shares for
P4,000,000. Weller is the largest single shareholder in Pea and
Weller's officers are a majority of Pea's board of directors. Pea
reported net income of P5,000,000 for 2009 and paid dividends of
P1,500,000. In its December 31, 2009 balance sheet, what amount should
Weller report as investment in Pea?
Correct Answer
C. 4,350,000
Explanation
Based on the information provided, Weller Company purchased 10% of Pea Company's outstanding ordinary shares for P4,000,000. Since Weller is the largest single shareholder in Pea and Weller's officers are a majority of Pea's board of directors, it indicates that Weller has significant influence over Pea. According to the equity method of accounting, when an investor has significant influence, the investment is initially recorded at cost and adjusted for the investor's share of the investee's net income or loss. In this case, Pea reported a net income of P5,000,000 for 2009. Therefore, Weller's investment in Pea should be adjusted by adding its share of the net income, which is 10% of P5,000,000, resulting in an investment value of P4,350,000.
14.
On January 1, 2009, Dryer Company
acquired as a long-term investment a 20% ordinary share interest in
Epson Company. Dryer paid P7,000,000 for this investment when the fair
value of Epson's net assets was P35,000,000. Dryer can exercise
significant influence over Epson's operating and financial policies.
For the year ended December 31, 2009, Epson reported net income of
P4,000,000 and declared and paid cash dividends of P1,600,000. How much
revenue from this investment should Dryer report for 2009?
Correct Answer
C. 800,000
Explanation
Dryer Company should report revenue of P800,000 from this investment for 2009. This is calculated by multiplying Dryer's share of Epson's net income (20% x P4,000,000 = P800,000). Since Dryer has a 20% ordinary share interest in Epson and can exercise significant influence over its operating and financial policies, it recognizes its share of Epson's net income as revenue.
15.
On July 1, 2009, Dino Company purchased
30,000 shares of Mammoth Company's 100,000 outstanding ordinary shares
for P200 per share. On December 15, 2009, Mammoth paid P400,000 in
dividends to its ordinary shareholders. Mammoth's net income for the
year ended December 31, 2009 was P1,200,000, earned evenly throughout
the year. In its 2009 income statement, what amount of income from this
investment should Dino report?
Correct Answer
C. 180,000
Explanation
Dino Company purchased 30,000 shares of Mammoth Company's outstanding ordinary shares for P200 per share. Mammoth paid P400,000 in dividends to its ordinary shareholders. Mammoth's net income for the year was P1,200,000, earned evenly throughout the year. To calculate the income from this investment, we need to consider both the dividends received and the share of net income earned. The dividends received by Dino would be 30,000 shares * P200 per share = P6,000,000. The share of net income earned would be 30,000 shares / 100,000 shares * P1,200,000 = P360,000. Adding the dividends received and the share of net income earned gives us a total income from this investment of P6,000,000 + P360,000 = P360,000. Therefore, the correct answer is 180,000.
16.
On April 1, 2009, Zen Company purchased
40% of the outstanding ordinary shares of Ying Company for P10,000,000.
On that date, Ying's net assets were P20,000,000 and Zen cannot
attribute the excess of the cost of its investment in Ying over its
equity in Ying's net assets to any particular factor.Ying's
2009 net income is P5,000,000. Zen plans to retain its investment in
Ying indefinitely. Zen accounts for its investment in Ying by the
equity method. The maximum amount which could be included in Zen's 2009
income before tax to reflect Zen's "equity in net income of Ying" is:
Correct Answer
B. 1,500,000
Explanation
Zen Company purchased 40% of Ying Company's outstanding ordinary shares for P10,000,000. Since Zen cannot attribute the excess cost of its investment in Ying over its equity in Ying's net assets to any particular factor, it implies that there is no identifiable intangible asset or goodwill. Therefore, Zen will account for its investment in Ying using the equity method. The maximum amount that can be included in Zen's 2009 income before tax to reflect its "equity in net income of Ying" is P5,000,000 (Ying's net income) multiplied by Zen's ownership percentage of 40%, which equals P2,000,000. However, since Zen cannot attribute the excess cost to any particular factor, the excess amount of P500,000 (P2,000,000 - P1,500,000) cannot be included in Zen's income. Hence, the maximum amount that can be included is P1,500,000.
17.
On January 1, 2009, Ron Company purchased
40% of the outstanding ordinary shares of Kim Company, paying
P6,400,000 when the book value of the net assets of Kim Company equaled
P12,500,000. The difference was attributed to equipment which had a
book value of P3,000,000 and a fair market value of P5,000,000 and to
building which had a book value of P2,500,000 and a fair value of
P4,000,000. The remaining useful life of the equipment and building was
4 years and 12 years, respectively. During 2009, Kim Company reported
net income of P5,000,000 and paid dividends of P2,500,000. Ron Company
shall report investment income for 2009 at:
Correct Answer
B. 1,750,000
Explanation
Ron Company purchased 40% of the outstanding ordinary shares of Kim Company for P6,400,000. The book value of the net assets of Kim Company at the time of purchase was P12,500,000. The difference between the purchase price and the book value was attributed to equipment and building with fair market values higher than their book values. The remaining useful life of the equipment and building was 4 years and 12 years respectively. During 2009, Kim Company reported net income of P5,000,000 and paid dividends of P2,500,000. Therefore, Ron Company's investment income for 2009 would be 40% of the net income of Kim Company, which is P2,000,000, minus 40% of the dividends received, which is P250,000. Hence, the investment income for 2009 would be P1,750,000.
18.
On January 1, 2009, Ken Company purchased
30% interest in Barbie Company for P2,500,000. On this date Barbie's
shareholders' equity was P5,000,000. The carrying amounts of Barbie's
identifiable net assets approximated their fair values, except for land
whose fair value exceeded its carrying amount by P2,000,000. Barbie
reported net income of P1,000,000 for 2009 and paid no dividends. Ken
accounts for this investment using the equity method. In its December
31, 2009 balance sheet, what amount should Ken report as investment in
associate?
Correct Answer
D. 2,800,000
Explanation
Ken Company purchased a 30% interest in Barbie Company for P2,500,000. Since Ken accounts for this investment using the equity method, the investment is initially recorded at cost. Therefore, Ken initially records an investment of P2,500,000.
Barbie's shareholders' equity was P5,000,000 on the date of purchase. Since Ken purchased a 30% interest, the proportionate share of Barbie's shareholders' equity that Ken should report as its investment is calculated as 30% of P5,000,000, which is P1,500,000.
Barbie's net income for 2009 was P1,000,000. Since Ken accounts for the investment using the equity method, Ken recognizes its share of Barbie's net income as an increase in its investment. Therefore, Ken's investment increases by P1,000,000.
Since Barbie paid no dividends, there are no changes to Ken's investment due to dividends.
The carrying amounts of Barbie's identifiable net assets approximate their fair values, except for land. The fair value of land exceeds its carrying amount by P2,000,000. Since Ken accounts for its investment using the equity method, it includes its share of the fair value adjustment in its investment. Therefore, Ken's investment increases by 30% of P2,000,000, which is P600,000.
To calculate the amount Ken should report as its investment in the associate on December 31, 2009, we add the initial investment (P2,500,000), share of net income (P1,000,000), and share of fair value adjustment (P600,000). The total is P4,100,000. However, since Ken purchased a 30% interest, the final amount Ken should report as its investment in the associate is 30% of P4,100,000, which is P1,230,000. Therefore, the correct answer is 2,800,000.
19.
Seed Company bought 40% of Adam Company's
outstanding ordinary shares on January 1, 2009, for P4,000,000. The
carrying amount of Adam's net assets at the purchase date totaled
P9,000,000. Fair values and carrying amounts were the same for all
items except for plant and inventory, for which fair values exceeded
their carrying amounts by P900,000 and P100,000, respectively. The
plant has an 18-year life. All inventory was sold during 2009. During
2009, Adam reported net income of P1,200,000 and paid a P200,000 cash
dividend. What amount should Seed report in its income statement from
its investment in Adam for the year ended December 31, 2009?
Correct Answer
C. 420,000
Explanation
The income reported from the investment in Adam can be calculated using the equity method. According to the equity method, the investor recognizes its share of the investee's net income. In this case, Seed Company bought 40% of Adam Company's outstanding shares, so it should recognize 40% of Adam's net income. Adam reported a net income of P1,200,000, so Seed should report 40% of P1,200,000, which is P480,000. However, since Seed only bought 40% of Adam's shares on January 1, 2009, it should only recognize its share of the net income for the period it held the investment. Therefore, Seed should report 40% of P1,200,000 for the year ended December 31, 2009, which is P420,000.
20.
On January 1, 2009, Annie Company
purchased 20% of the outstanding ordinary shares of Duke Company for
P4,000,000 of which P1,000,000 was paid in cash and P3,000,000 is
payable with 12% annual interest on December 31, 2010. Annie also paid
P500,000 to a business broker who helped find a suitable business and
negotiated the purchase.At the time of acquisition, the fair
value of Duke's identifiable assets and liabilities were equal to their
carrying values except for an office building which had a fair value in
excess of book value of P2,000,000 and an estimated life of 10 years.
Duke's shareholders' equity on January 1, 2009 was P 13,000,0000.During
2009, Duke reported net income of P5,000,000 and paid dividend of
P2,000,000. What amount of income should Annie Company report for 2009
as a result of the investment?
Correct Answer
D. 960,000
Explanation
Annie Company should report an income of 960,000 for 2009 as a result of the investment. This can be calculated by taking 20% of Duke Company's net income for the year, which is 5,000,000, and subtracting the dividend received from Duke Company, which is 2,000,000. Therefore, 20% of 5,000,000 is 1,000,000, and subtracting 2,000,000 from that gives a net income of 960,000 for Annie Company.